The Classical Gold Standard

The classical gold standard was the first truly international monetary system based on fixed exchange rates. It emerged during the second half of the nineteenth century lasted into the second decade of the twentieth century and underpinned the growth in trade and overseas investment prior to World War I. At its peak, more than 35 countries and colonies used gold to back domestic currency issues, accounting for roughly 70 percent of the world's trade and 67 percent of its GDP (Chernyshoff, Jacks, and Taylor 2009). Under this regime, countries individually adhered to rules requiring them to fix the prices of their domestic currencies in terms of a specified amount of gold. Long-run adherents followed policy prescriptions (mainly, limitations on the issuance of domestic currency) that made the defense of these fixed exchange rates feasible. This chapter examines how the gold standard operated, why countries moved from silver and bimetallic standards to gold, what the costs and benefits of being on gold were, and how economies performed while part of this fixed-exchange regime. ¹